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RECEIVED FEB 0 I 2016 OFFICE OF THE SECRETARY U.S. SECURITIES AND EXCHANGE COMMISSION Matter of EQUITY TRUST COMPANY, A.P. File No. 3-1 6594 Respondent. RESPONDENT'S POST-HEARING BRIEF Howard M. Groedel Ulmer & Berne LLP 1660 West 2nd Street, Suite 11 00 Cleveland O H 44113-1 448 2 16.583.7 11 8 I [email protected] Stephen J. Crimmins Brian M. Walsh Murphy & McGonigle PC 555 13th Street NW Washington DC 20004 202.661.703 1 I stephen.crimmins@ mmlawus.com 202.661. 7030 I bria n.walsh@ mmlawus.com Dated: January 28, 2016 TABLE OF CONTENTS PROPOSED FINDINGS OF FACT ......................................................................... 1 I. ETC'S ROLE AS AN SD IRA CUSTODIAN ............................................... .1 A. LIMITED DUTIES OF SDIRA CUSTODIANS ....................................... 2 B. SPECIFIC LIMIT ATIO NS IN ETC'S CUSTOMER AGREEMENTS .............. 5 C. ETC'S CUSTOMER ACCOUNT REVIEWS ...........................................9 II. FACTS PERTAINING TO EPHREN TAYLOR .......................................... .10 A. ETC'S CONT ACT WITH TAYLOR ................................................... 11 B. TAYLOR'S PUBLIC PROFILE AND EDGAR DISCLOSURES .................. 13 C. NO ENDORSEMENT OFTAYLOR .................................................... 16 D. "'HOLD" ON TAYLOR-RELATED INVESTMENTS .............................. .30 III. FACTS PERTAINING TO RANDY POULSON .......................................... 33 A. ETC'S CONTACT WITH POULSON .................................................. 34 B. POULSON'S PUBLIC PROFILE AND BUSINESS ................................. 35 C. NO ENDORSEMENT OF POULSON ................................................. 36 D. ''HOLD" ON POULSON-RELATED INVESTMENTS ............................ .43 CONCLUSIONS OF LAW AND ARGUMENT ....................................................... .44 I. THE DIVISION HAS NOT CARRIED ITS BURDEN OF PROVING THE "CAUSE" ELEMENT .........................................................................45 A. THE "SUFFICIENT NEXUS" REQUIREMENT ..................................... .45 B. ETC NOT A "CAUSE" OF TAYLOR'S VIOLATION ..............................47 C. ETC NOT A "CAUSE OF POULSON'S VIOLATION ............................. .48 II. THE DIVISION HAS NOT CARRIED ITS BURDEN OF PROVING THE "PRIMARY VIOLATION" ELEMENT .................................................... 50 A. PROOF OF TAYLOR'S PRIMARY VIOLATION .................................. 51 B. PROOF OF POULSON'S PRIMARY VIOLATION ................................. 53 III. THE DIVISION HAS NOT CARRIED ITS BURDEN OF PROVING THE REQUIRED MENTAL STATE ELEMENT ................................................55 A. THE KPMG STANDARD FOR ASSESSING MENTAL STATE .................55 B. THE DIVISION HAS NOT PROVED SCIENTER OR NEGLIGENCE BY ETC IN ALLEGEDLY CAUSING TAYLOR'S VIOLATIONS .......................... 56 C. THE DIVISION HAS NOT PROVED SCIENTER OR NEGLIGENCE BY ETC IN ALLEGEDLY CAUSING POULSON'S VIOLATIONS ......................... 59 IV. NO BASIS FOR MONETARY SANCTIONS AGAINST ETC IN THIS MATTER ......................................................................................... 60 A. NO BASIS FOR DISGORGEMENT ....................................................60 B. NO BASIS FOR A PENALTY ........................................................... 61 V. ETC'S CONSTITUTIONAL DEFENSES .................................................. 62 A. FIFTH AMENDMENT RIGHT TO DUE PROCESS ................................................................................... 62 B. SEVENTH AMENDMENT RIGHT TO JURY TRIAL. ............................. 62 C. ARTICLE II REQUIREMENTS FOR EXECUTIVE POWER AND APPOINTMENTS ......................................................................... 63 CONCLUSION ............................................................................................... 64 U.S. SECURITIES AND EXCHANGE COMMISSION Matter of EQUITY TRUST COMPANY, A.P. File No. 3-16594 Respondent. RESPONDENT'S POST-HEARING BRIEF Respondent Equity Trust Company ("ETC") files this post-hearing brief, including proposed findings of fact and conclusions oflaw, pursuant to Rule 340 of the Rules of Practice and as directed at the conclusion of the hearing. As discussed below, the Division has not carried its burden of proving that ETC was a "cause" of the primary securities fraud violations it has alleged. "'For 'causing' liability, three elements must be established: (1) a primary violation; (2) an act or omission by the respondent that was a cause of the violation; and (3) the respondent knew, or should have known, that [its] conduct would contribute to the violation." Matter ofSpring Hill Capital Markets, LLC, 2015 WL 7730856 at *12, l.D. Rel. 919 (Nov. 30, 2015) (ALJ Foelak). Based on the hearing testimony and exhibits, ETC requests that the Initial Decision (i) adopt the proposed findings of fact set forth below, (ii) conclude that ETC was not a cause of a primary securities law violation, and (iii) dismiss this proceeding in its entirety. PROPOSED FINDINGS OF FACT Based on the record evidence cited below, ETC requests that the Initial Decision make the following findings relating to (i) ETC and its role as a self-directed IRA custodian (Point I below); (ii) Ephren Taylor and his related entities, including City Capital Corporation (Point II); and (iii) Randy Poulson and his related entities, including Equity Capital Investments LLC and Poulson Russo LLC (Point III). (The Division's exhibits are cited below as "DX-_," and Respondent's exhibits are cited as ""RX-_.") I. ETC'S ROLE AS AN SDIRA CUSTODIAN With offices in Ohio and South Dakota, ETC serves as custodian for over 130,000 self­ directed individual retirement accounts ("self-directed IRAs" or "SDIRAs") holding over $12 billion in assets. It is one of the largest SD IRA custodians in the United States. Many major Wall Street financial firms regularly refer customers to ETC for custody of SDIRA assets that they do not handle, such as real estate. (Desich Tr. 961-64) As discussed below, its duties as an SD IRA custodian are appropriately limited, both as a matter of law and by contract. As a South Dakota-chartered public trust company, ETC conducts its business subject to the regulation and biennial examinations of the South Dakota Division of Banking. (S. Kelly Tr. 1160) During these recurring examinations, state regulators have consistently determined that ETC ranked "2" on a scale of "5," meaning that its operations satisfied state regulators and that it is grouped with the vast majority of the dozens of trust companies the state regulates. State regulators saw ETC adopting the "best business practices" recommendations it received and viewed ETC as "improving" its operations over time. (S. Kelly Tr. 1194-1200) A. Limited Duties of SDIRA Custodians Congress, the courts and federal agencies all recognize that, in return for limited custodial fees, SDIRA custodians appropriately do not, among other things, (i) evaluate an investment's quality or legitimacy; (ii) perform research or due diligence on a customer's investment; (iii) check the accuracy of available financial information regarding the sponsor of any investment; (iv) assume responsibility for investment performance; (v) independently verify accuracy of reported valuation and other information related to the investment; or (vi) obtain independent appraisals of hard-to-value assets. (1) Congress and the IRS. Decades ago, Congress specifically authorized the SDIRA model, which has proven successful as a tool for investors seeking to include alternative assets, most often real estate and notes, in their portfolios. Section 408 of the Internal Revenue Code permits a self-directed IRA to hold nontraditional investments such as promissory notes, unregistered securities, or real estate, while receiving the favorable tax treatment of an IRA. However the Code requires that the self-directed IRA must be held at an account trustee or custodian, such as ETC. The Internal Revenue Service's Form 5305-A, the "model" IRA custodial agreement issued under 26 U.S.C. §408, "explicitly provides that ... the IRA account holder and account administrator ... might choose to limit each others' duties and responsibilities through exculpatory provisions." Mandelbaum v. Fiserv, Inc., 787 F. Supp. 2d 1226, 1239, 1241-42 (D. Colo. 2011) (dismissing claims against SDIRA custodians where accounts invested in the Madoff Ponzi scheme, and where Madoff allegedly "required" investors to use the defendant custodians). IRA custodians are not fiduciaries: IRC §408(h) recognizes that custodial IRAs ... are not trusts. They are only treated as trusts for tax deferral purposes. Courts applying this section of the 2 code in relation to custodial IRA accounts have held that IRC §408 and the corresponding regulations do not create any fiduciary or other duties of care .... Hines v. Fiserv, Inc., 2010 WL 1249838, at *3 (M.D. Fla. March 25, 2010). As to reporting SDIRA asset values to the IRS annually, the IRS has made it clear that SDIRA custodians are not obliged to get independent appraisals of hard-to-value assets - assets without a regular trading market. In the leading IRS guidance, an August 6, 1993 response letter, Thomas Brisendine, Chief of Branch 1, Office of the Associate Chief Counsel for Employee Benefits and Exempt Organizations, states that in reporting valuation to the IRS, "[ s ]o long as the trustee [the IRA trustee or custodian] reports the information that it receives from the partners, it is under no obligation

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